The Federal Reserve steers the American economy and yet it remains a system that is shrouded in mystery. Few understand the logic behind its policy decisions, decisions that have a profound effect on the US economy. And over the years it has operated seemingly independently of the more democratically elected arms of the US government. Its public stance, generally lacking in transparency has fueled conspiracy theories. Some even suggest its formation lead directly to the Great Depression.

So just what is the Federal Reserve? Why was it formed in the first place? And how does its monetary policy affect the lives of everyday US citizens? Here we do our part to demystify the Federal Reserve.

[Editor’s note: Two visual approaches to graphing out the Federal Government’s expanding effort to “invest” in the economy during the financial crises and prevent another “Great Depression”. One from the Washington Post uses a tree map (1 | 2 | 3) approach to show all the individual parts of the bailout in relative size to each other in 1 single block. The New York Times offering uses an illustrated narrative form where each part is still scaled relative to the others but it is shown in isolation with explanation text. The two graphics are not directly comparable as they use different grouping categories. Please note the Post graphic was 3/4 of a page while I think the Times graphic was smaller.

The NY Times used a similar tree mapping approach in their recent All of Inflation’s Little Parts interactive. I’m quite taken with this approach! It reminds me of cartograms but focusing on the data topology instead of being held captive by the “shape” of countries. Countries are to most people nominal lists and when physical geography (arrangement, proximity, etc) does not influence pattern, I think this is a better approach.]

Graphics below republished from Washington Post and New York Times (story | graphic), both from 26 November 2008. Top graphic (graduated circle “bubbles”) is NY Times.

This interactive from last month hasn’t aged at all.
From the New York Time’s Matthew Bloch, Shan Carter and Amanda Cox.
Clipped version above. View the full-size version here.

From the NY Times:

Each month, the Bureau of Labor Statistics gathers 84,000 prices in about 200 categories — like gasoline, bananas, dresses and garbage collection — to form the Consumer Price Index, one measure of inflation.

It’s among the statistics that the Federal Reserve considered when it cut interest rates on Wednesday. The categories are weighted according to an estimate of what the average American spends, as shown below.

An Average Consumer’s Spending

Each shape below represents how much the average American spends in different categories.
Larger shapes make up a larger part of spending.